Finance and Public Administration Committee: finance update

C. Scotland Reserve and Funding Position Details

62. Table 1.7 of the Budget Revision document sets out the Funding Position that supports the revised Scottish Budget. The table below breaks this down by the HM Treasury budget classifications of Fiscal Resource, Capital and Financial Transactions.

63. This presentation begins with the Scotland Reserve as reported in the 2021-22 provisional outturn statement. It then aggregates all movements in funding in arriving at the Autumn Budget Revision position.

64. What this presentation does not do is provide a full breakdown of the Scottish Government funding envelope by source, nor does it reflect the full forecast position for the remainder of the year. The sections below provide further detail on the movement across all sources of funding, as well as the forecast Scotland Reserve position.

C.1 Funding Envelope Breakdown

65. Annexes A and B detail the funding envelopes for each of the three key budget classifications at the Budget Bill, along with the changes allocated within the Autumn Budget Revision and the latest unallocated position.

66. The totals reconcile to the breakdown set out above, which in turn reconciles to table 1.7 in the supporting document. There are a number of points to draw attention to given previous correspondence with the Finance and Public Administration Committee. It should also be noted that these totals detail discretionary funding only and not the technical or AME related changes.

C1.1 Fiscal Resource

67. Borrowing Costs have historically been included within the Finance and Economy Portfolio allocation but deducted from the Scottish Budget as they are a charge on the Scottish Consolidated Fund. As Budget Revision documents are prepared on a Scottish Budget basis the change in these costs of c£8m is included here as a funding change. Following the Resource Spending Review, these costs will be included on the "funding side" of the Scottish Budget for all subsequent budget documents.

68. The £620 million "Other Income" assumption in the Scottish Budget contained three specific sources, Scotwind Income (£40m), Income from settling the Spillover dispute (£400m) with the UK Government and expected Barnett Consequentials (£180m).

69. Given the significant volatility in the period between January and March this year a number of changes were made to these assumptions:

• £120 million was added to the Scotland Reserve assumption in the Scottish Budget to fund the additional allocation to local government.
• £296m of Consequentials from the Cost of Living Announcement in February were deferred outside of the Scotland Reserve and are therefore included within the total Resource Consequentials line of £447 million.
• The majority of the £180 million anticipated consequentials were received, but in 2021-22, and therefore these items were deferred within the Scotland Reserve.

70. In subsequent months the following additional changes occurred:

• Spillover dispute concluded with a settlement of £375m, the difference of £25 million is in part due to financial year 2022-23 being excluded from the agreement, with all future years being subject to resolution in the fiscal framework review.
• £56 million of additional Scotwind clearing funds being added as per the Deputy First Minister's letter to the committee of the 7^th September.
• £156 million of other income arising from a number of sources including; the voluntary donations from recipients of rate reliefs during Covid, additional interest income, and a correction to historic errors in Income tax BGAs (this is included in full within the Other line.)

71. Whilst this is a complicated picture, the full "Other Income" funding assumptions have been met, and surpassed by £324 million when the borrowing cost adjustment is reflected in full.

72. Changes to the consequentials line include the £296 million which were deferred (as per above), and the £151 million of Barnett Consequentials which have arisen following UK Cost of Living announcements in the Spring and early summer as well as the full effect of the UK Main Estimate Process.

C1.2 Capital and Financial Transactions

73. Changes to the Capital and Financial Transactions position are more straightforward.

74. The excess £65 million Capital which became available in the Scotland Reserve following the provisional outturn process was used to fund the Scottish Government contribution towards military support for Ukraine. This does not get attributed to portfolio expenditure and is directly deducted from funding.

75. Further changes to Capital include an additional £25 million of City Deals funding and £13 million of Barnett consequentials received at the UK Main Estimate.

76. The only change to the Financial Transactions position is the deduction of £15 million in respect of Scotland Reserve availability. However this "funding pressure" has already been met from within the £23 million of FT budget returned to the centre.

C.2 Anticipated funding changes not in budget revision

77. Just as the changes to portfolio allocations reflected in the Autumn Budget Revision do not reflect the full forecast pressure on the Scottish Government Budget; the "unallocated" funding following the Autumn Budget Revision (of £94 million) does not reflect the full extent of likely resources available for deployment in the Spring Budget Revision or to support the spending which will ultimately be reflected in outturn.

78. Changes to block grant adjustments, fully devolved tax proceeds, borrowing, as well as additional migrant surcharge funding and to other smaller sources of income are currently factored in to the Scottish Government budget monitoring forecasts. But these forecast changes do not meet the level of certainty required for inclusion within the Autumn Budget Revision. Note that Non Domestic Rates and Income Tax are locked into the funding position when the Budget is set and will not change other than through the reconciliation process in subsequent years or with NDR, through the pool.

79. As a general rule, the level of certainty required for formally updating the Scottish Budget increases with the passage of time. A Scottish Budget requires a higher level of certainty than a Spending Review, the certainty required for an Autumn Budget Revision is higher still; and the Spring Budget Revision more so.

80. At the time of this publication the net tax and block grant adjustment position had improved by £31 million – as a result of revisions to BGAs and SFC forecasts between December and May, plus a projected £35 million in estimated adjustment to the BGAs as result of the Stamp Duty Land Tax announced as part of the UK "mini budget". Demand led Social Security forecasts also increased by £105 million on the basis of the same SFC forecast in May which also alters the Scottish Government's resource borrowing limits. Currently, the Scottish Government anticipates having to maximise its Resource Borrowing capacity to address these specific changes, and the challenging fiscal position more broadly, but all of these positions are subject to considerable further volatility.

81. The Block Grant Adjustments (published on the 17th November alongside the OBR forecast) will determine the final BGAs for the 2022-23 Scottish Budget, but the equivalent SFC forecasts in December will not. Gross changes to Social Security expenditure and Devolved tax receipts will continually be updated right until the end of March. Final decisions on Resource borrowing will be taken close to the end of the financial year based on the latest budget monitoring position.

82. The Migrant Surcharge income is collected by the Home Office and re-distributed to Devolved Governments on a Barnett basis. These amounts tend to be added at a Supplementary or Main Estimate based on continually updated assessments. Of the £92 million anticipated at the Scottish Budget only c£60 million has been formally added to date but we currently anticipate the Budget figure to be surpassed when the final funding adjustment is included within the 2022-23 UK Supplementary Estimate process.

83. Other small sources of income such as the King's Lord Treasurer Remembrancer (KLTR, formerly QLTR) are dependent on the monthly receipts.

84. In addition it should be caveated that the opening Scotland Reserve position included within the Autumn Budget Revision is based on Provisional Outturn as reported to Parliament in June. This position will be updated to reflect the Final Outturn position when the equivalent funding tables are presented as part of the Spring Budget Revision.

C.3 Scotland Reserve

85. The full Scotland Reserve position from prior years, updated with provisional outturn detail in respect of 2021-22, is detailed below.

86. As is illustrated above, all Reserve availability is planned to be utilised to support the 2022-23 financial position. Therefore as discussed in section C.2 the "balancing" unallocated figure of £94 million will not remain in the Scotland Reserve, it simply hasn't been formally allocated in the Budget. All remaining funding is set against the range of pressures which the Scottish Government continues to manage and which has to balance over the remainder of the financial year.

87. As the Deputy First Minister outlined in Parliament on the 2nd November, the 2022-23 budget challenge also has a knock-on impact for 2023-24 funding assumptions. The resource spending review funding assumptions included some anticipated Scotland Reserve carry forward, (£279 million). However any 2023-24 reserve availability is based on specific funds being deferred or underspends being generated in the latter months of 2022-23.

88. As is always the case at this time of year, the funding position and the spending that it supports, remains subject to further change. The level of uncertainty surrounding expected UK Block Grant funding has been particularly acute given the amount of UK political upheaval. A final Block Grant position will only be confirmed at the conclusion of the UK Supplementary Estimate process. There remain a number of significant potential budget pressures that are not yet fully quantified, including key public sector staff groups where pay agreements have yet to be settled. Active management of the position will continue to be required to balance the 2022-23 Budget. It is hoped that the Spring Budget Revision will include all major changes to both funding and budget allocations that will be required, to support appropriate scrutiny, but further adjustments to spending plans may subsequently be required.